Spain’s debt one step from ‘junk status’

SPAIN’S borrowing costs have risen to record levels, prompting fresh fears that the country’s bank bail-out may not be enough to save the country from economic chaos.

The interest rate on Spain’s benchmark ten-year bonds rose to a record 7.02 per cent yesterday, breaching the level that triggered a collapse in confidence in Portugal, Ireland and Greece.

The rate was recorded shortly after ratings agency Moody’s downgraded Spain’s sovereign debt three notches, from A3 to Baa3, leaving it just one grade above “junk status”.

Moody’s said the downgrade was caused by the offer from other eurozone leaders of up to €100 billion (£81bn) to prop up Spain’s failing banking sector.

It had been hoped that the bail-out would help to calm fears in the financial markets about the strength of Spain’s banks and ease Madrid’s borrowing costs.

But Moody’s considers that accepting the offer will add to the Spanish government’s debt burden.

If Spain is cut to junk, some investors would be forced to sell their bonds, pushing financing costs higher and heightening the risk that the country will need a full-blown bail-out.

“The clock is definitely ticking,” said Michael Hewson, an analyst with CMC Markets.

The bail-out is intended to recapitalise the Spanish banking system and calm Europe’s debt crisis.

Instead, investors seem unnerved by the government taking on extra debt and have pushed Spanish bond yields higher all week.

Economy minister Luis de Guindos called for calm, saying that Spain “had a road map” on how to resolve the crisis.

Foreign minister Jose Manuel Garcia-Margallo compared sharing the common currency to a shipwreck. “If the Titanic sinks, it takes everyone with it, even those travelling in first class,” he said.